CarMax, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended November 30, 2023; comparative periods ended November 30, 2022. Unaudited interim results. CarMax operates used-vehicle sales and CarMax Auto Finance (CAF); it reported 241 stores in 109 U.S. markets.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net sales and operating revenues | $6.149B | $6.506B | $20.909B | $23.962B |
| Gross profit / margin | $612.9M / 10.0% | $576.7M / 8.9% | $2.127B / 10.2% | $2.189B / 9.1% |
| CAF income | $148.7M | $152.2M | $421.0M | $539.5M |
| SG&A | $560.0M | $591.7M | $1.705B | $1.915B |
| Earnings before tax | $110.6M | $50.0M | $576.1M | $554.2M |
| Net earnings / diluted EPS | $82.0M / $0.52 | $37.6M / $0.24 | $428.9M / $2.70 | $415.8M / $2.60 |
Quarterly revenue declined 5.5%, while gross profit rose 6.3% and net earnings more than doubled. For the nine months, revenue declined 12.7%, gross profit fell 2.8%, and net earnings rose 3.2%. Net margin was 1.3% in the quarter versus 0.6%; year to date it was 2.1% versus 1.7%.
- Sales: Q3 used-vehicle units fell 2.9% to 174,766 and average selling price fell 4.6% to $27,228; used revenue declined 7.2%. Wholesale units increased 7.7% to 127,900, but average selling price fell 6.7%. Q3 used gross profit per unit was $2,277; wholesale gross profit per unit was $961.
- Cash flow: Nine-month operating cash flow was $149.0M, versus $1.662B a year earlier; investing cash flow was negative $357.2M, including $355.4M of capital expenditures; financing cash flow was positive $517.3M. Cash and cash equivalents were $605.4M at November 30, compared with $314.8M at February 28. Including restricted cash, period-end cash was $1.260B.
- Debt and liquidity: Total debt was $18.948B, including $17.029B of non-recourse notes primarily backed by CAF loans. Cash was $605.4M. The $2.0B revolving credit facility was undrawn and fully available; warehouse facilities had $1.07B of unused capacity. The $300M term loan matures in June 2024. CarMax reported compliance with financial covenants and funding-vehicle performance triggers.
- CAF credit: Managed receivables totaled $17.505B. CAF income declined 2.3% for the quarter and 22.0% year to date. Quarterly net interest margin was 5.9%, down from 6.7%; annualized net credit losses were 2.16% versus 1.74%, and past-due accounts were 5.81% versus 4.99%. The allowance was $511.9M, or 2.92% of managed receivables.
Material changes and management commentary
- Lower retail sales volumes and vehicle prices drove revenue declines. Management cited persistent affordability challenges, inflation, higher interest rates, tighter lending standards, and low consumer confidence.
- Gross margin improved in Q3 as used-vehicle gross profit per unit remained relatively steady and service department margins improved. Lower SG&A also supported earnings. Year-to-date SG&A included a $67.2M benefit from settlement proceeds related to Takata-airbag vehicles; management said nine-month diluted EPS included a $0.32 benefit from this settlement.
- CAF funding costs and unfavorable effects from non-hedge-designated swaps reduced interest margin, partly offset by higher customer rates. CAF tightened underwriting and reduced its targeted Tier 3 originations to less than 5%; management attributed higher delinquencies and net charge-offs to customer hardship and portfolio mix.
- Operating cash flow fell sharply year over year, partly reflecting the prior-year inventory reduction and changes in auto loans receivable. CarMax notes that auto-loan changes are largely funded by non-recourse debt and cash-flow-statement presentation can cause large operating/financing cash flow movements without a comparable effect on overall liquidity.
Outlook, risks and contingencies
- Management expects Q4 FY2024 used-vehicle gross profit per unit below the prior-year record quarter, but full-year used and wholesale gross profit per unit in line with the prior year. It expects service results to improve year over year for FY2024 and does not expect EPP profit-sharing revenue in Q4. CAF margin was expected to remain relatively stable near term, subject to market conditions.
- Management’s initial goal is annual SG&A at a mid-70% range of gross profit over time. It said it was on track to outperform its beginning-of-year target of needing low-single-digit gross profit growth to leverage SG&A for the full year, excluding settlement benefits.
- FY2024 capital expenditures were estimated at approximately $450M. The company planned four additional store openings and a stand-alone Atlanta reconditioning center during the rest of the fiscal year. Long-term targets disclosed previously include selling 2.0–2.4 million vehicles and generating $33B–$45B in revenue by FY2026, and exceeding 5% national share of the age 0–10 used-vehicle market by end-2025; management cautioned these targets depend on macroeconomic conditions.
- Key risks include used-car price and inventory volatility, consumer affordability and demand, CAF credit losses and delinquencies, funding costs and access to securitization/warehouse markets, competition, and execution of growth and omni-channel initiatives. A California wage-and-hour/PAGA matter is ongoing; the company said it could not reasonably estimate potential loss. Other proceedings were not expected to materially affect results.
Important facts for investors to verify
- Whether retail unit volumes, comparable-store sales, and average selling prices stabilize as affordability pressures persist.
- CAF delinquency, net-loss and recovery-rate trends, underwriting changes, funding costs, and the allowance adequacy.
- How much reported year-to-date earnings benefited from the $67.2M Takata-related settlement and whether expense reductions are sustainable.
- Cash generation excluding CAF loan-funding movements, planned capital spending, the June 2024 term-loan maturity, and renewal terms for warehouse facilities.
- Progress against management’s gross-profit-per-unit, SG&A leverage, store-opening, and long-term market-share targets.